An American Perspective from China

Google vs. China: War of Words

The controversy sparked by Google’s threat to pull out of China is really heating up. Here are two interviews that give my perspective on this issue. For those who are interested in the topic, I highly recommend listening to both because they cover very different ground.

The first is a podcast presented by the American Chamber of Commerce in China. It focuses on the key issues from a global business perspective, emphasizing the impact on China’s business climate and economic ambitions. You can check it out here.

The second is a radio show I did this morning on China Radio International. You can listen in or download it here. The program gives a good idea of the assertive new line China is taking in the Google dispute, and how the government is hoping to define the issue in the minds of Chinese people.

The original argument that got a lot of play in the Chinese media was that Google’s threatened departure was merely an excuse to pull out of a market where it has been doing badly. I was somewhat surprised that hardly anyone tried to make that case this morning — it was hinted at, but perhaps because most well-informed observers find it unconvincing, no one pressed the point.

Instead, especially following Hillary Clinton’s high-profile speech this past week, the focus has shifted towards portraying Google as a tool of the U.S. government, which is trying to bully China. The argument, essentially, is as follows: (1) all countries, including the U.S., restrict the Internet, (2) China’s restrictions reflect China’s values and protect its national integrity, (3) the U.S. is a big hypocrite and using the concept of Internet freedom to humiliate and undermine China.

Never mind that banning child pornography is not quite the same thing as banning political debate, or that spying on violent terror cells is not quite the same as spying on foreign investors. Such leaps of logic are unlikely to persuade many Americans, but they resonate deeply in China. The only thing that gets a young Chinese netizen more riled up than the Great Firewall is any kind of perceived foreign insult to China. They may hate censorship, but they are fiercely (sometimes rabidly) proud of their country and will close ranks behind it if that becomes the issue.

Unfortunately, Hillary’s speech — while well intentioned — played right into that storyline. Of course, the U.S. government had to get involved on some level because the cyberattack on Google raised serious security concerns. But to turn Google’s decision into some kind of morality play — American virtue vs. Chinese oppression — robs it of its real impact, that actions speak louder than words. Google has decided it is no longer worth doing business in China. Many other foreign companies in China shares its concerns. Whether you agree with it or not, Google’s decision will have consequences. It is up to the Chinese to decide what to make of those consequences.

I’m struck by the fact that, among the Chinese guests this morning, there is a stubborn refusal to believe that Google might actually leave China. Surely Google is bluffing, or playing at some game. As I pointed out in my first blog post on this subject, the day Google’s announcement came out, that the bedrock assumption in China has always been that no one could possibly be willing to walk away from the Chinese market. One of the radio guests actually said that today. It’s a classic case of cognitive dissonance: when the evidence contradicts a long-held belief, you stick with the belief over the evidence, and attempt to rationalize.

Now, it’s possible that China and Google will work out their differences — I’m not making any predictions. But most people I’ve talked to — leaders in the business community here and journalists who have covered business in China for a long time — believe that Google will go. And when that happens — if it happens — reality will gradually set in, for Google and for China. “You’ll be sorry!” the Chinese shout after Google. And maybe that’s true. But what if it’s not?

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Well balanced. This may be the start of reverse globalisation as I call it since the economics of producing in China for many goods and shipping into N America and Europe are being whittled away. The fact, if this will be the end result, that Google exits China will probably add to the exodus for economic reasons – why is GE bulding a new appliance factory in Lousiville and not in china – just listen to what Immelt said – costs and logistics; and Panasonic stating that they would relocate some businesses out of China and into Europe for the same reasons – but one differnce: in the typical and normal Japanese geese formation the others follow together with their suppliers. This is the new world which is unfolding in contrast to the world we have lived through in the last decade. When this grows into accepted fact, China will then be exposed. And success has fueled self-belief and assertiveness which is being reflected in their huge plays into commodities – what happens if prices collapse this year?

Google and China are bringing up a 21st century battle of democracy and freedom verse Communism and restricted personal freedom. When we started using cloud computing systems we saw the HUGE area of security problems being created in cross country internet usage. Thrown in that the entire world is “outsourcing” computer stuff to Southeast Asian countries, and you have to plan for these socio-technology issues going forward. We study search demand/supply trends from around the world to find profitable niches and products. A niche, or hot predictions, is not just a demand side issue, but a supply/demand curve. If you predict IPHONE apps will take off, and there are already 100,000 aps, then you aren’t going to hit that one. If you see that demand for cell phone radiation shields is going nuts and there are only two suppliers, then you can be pretty sure that it will be a good year for those 2 supplies. The software at http://www.TheInternetTimeMachine.com studies both the demand (search volume) and supply (think “results” in Google). The Google Phone is generating much more buzz right now then say the Apple Tablet.
Cheers,
Curt
Here is a video on what I mean.. http://bit.ly/SupplyDemandCurves

“Google has decided it is no longer worth doing business in China. Many other foreign companies in China shares its concerns”

Share what concerns? You are being melodramatic. Business enters the China market, like it does every market, because there is a profit to be had. Google doesn’t change this.
This can generate a huge pie for everyone, but China is greedy and wishes to transfer part of the producer’s surplus to itself. It does so less through tariffs which are more market distorting and face more legal constraints, but rather through technological transfer requirements, JV control requirements, lax IP enforcement, limitations to nurture domestic companies, etc. Google doesn’t change this.

China isn’t omnipotent. At some point, it’s no longer worth it for the company to enter, or becomes worth it to leave. China has to stop short of this point. China also doesn’t have full negotiating powers; it has much to lose if the pie doesn’t materialize. Sometimes it has more power (automobiles) and sometimes it has less (iron ore). Google doesn’t change this.

Sometimes, there is no pie. The surplus, when taken into account externalities on stability, and the protection of local companies and jobs on China’s end, and global image/strategic externalities on the foreigner’s end may not be positive. This is dynamic. As stability becomes less of an issue and domestic companies are strong enough or too monopolistic and in need of competition, the pie will enlarge (financials, telecom), other times, it will shrink (media?). Google doesn’t change this.

The foreign companies, always have, and always will, negotiate a pie splitting deal with China, and have “concerns” that China is “unfairly” taking too big a piece. Or if there is no pie, they will leave (opium 1907, arms 1989, Levi 1993) Google doesn’t change this.

So how big is the Google pie?

If the pie is positive, then either the government is better off accepting open internet to keep Google, or Google is better off staying in China despite censorship (or both).

As you say, the evidence appears to show that this is false. But that is accepting the false claim that Google = http://www.google.cn. In fact, the evidence only shows that Google would be happy to lose the censored .cn and keep the uncensored .com, its Gmail services, its sales team which advertises .com ads to Chinese companies (the majority of its China revenue), android, etc. This would relieve it of its PR problem and as China liberalizes, the .com service would give increasingly better user experience. In fact, Google itself repeatedly says that it has no intention of leaving China.

Is Google playing games?

The pie is still there; only http://www.google.cn is a net negative. But Google can easily quietly shut it down and retain all its other services, making the pie better for everyone. But instead, it chose to humiliate the Chinese government, and the morality play is most certainly a part of that. To claim otherwise is naive. It chose to humiliate China (let’s not keep pretending only the government is hurt here) to advance its more important strategy of global net-openness.

In the best Google scenario, if the US government is able to trade some horses and open up China’s internet (at the cost of other strategic imperatives), Google will even get to suck profit from a negative pie (from whatever was exchanged for this concession). If this isn’t “playing games” then I don’t know what is. For once, the rabid Chinese nationalists are not paranoid.

“You’ll be sorry!” But what if Google is not?

The Chinese government can easily make it so that Google regrets it, by blocking access to Gmail, android, etc., if it is willing to suffer the consequences. But to make an example out of Google is a silly response: there is no wave of companies wishing to humiliate China held back only by the threat of retaliation.

The best response would be to cave in and free internet completely (including piracy and porn of course! One can dream..), but a rational response would be to rattle some sabers to get popular opinion behind the government, then let http://www.google.cn die without making a big fuss, let the rest of Google stay in China like all the other foreign companies, and continue to try to efficiently grab the biggest piece of pie possible.

This is no watershed event (outside the narrow search engine space). And as a seeking alpha reader, I implore you to finish the promised second part of the real estate piece.

Second part on real estate is coming, ASAP! But I can tell you that, in the eyes of the foreign business community here in China, Google’s threatened pull-out is definitely being seen as a watershed event. As Jim McGregor’s piece in Time indicates, it captures a broader mood. Whether that feeling proves to be momentary or more enduring, only time will tell.

For a really interesting perspective on Google’s competitive challenges in China, and some novel insights on the entire issue from a Chinese consumer point of view, I highly recommend checking out Tricia Wang’s blog entry at http://culturalbytes.com/post/340498962/googleandchina.

What seems to be beyond the scope of the ongoing discussion is whether a potential exit will also affect the cell phone market. Since Google became a political football in the US-China relations, would it be irrational to assume that Gphones and android will be banned from the market and that Chinese hardware OEMs will be pressured to end cooperation with Google? At least, it could play a role in the bargaining between Google and officials.